This is an observation that I have made before in this blog, but I was a little surprised to see similar thoughts appear in an analysis piece by Joe Nocera in the New York Times on Saturday under the title "S.E.C. Chased Small Fry While Big Fish, Madoff, Swam Free." The article makes a pretty compelling case that there is an institutional bias in favor of chasing the small fry over the big fish. Among the points that Nocera makes is that the SEC enforcement people are judged on cases they bring and win.. As Nocera points out, the small fish tend to be easier marks. They settle and pay the fines, even if they may not be guilty. In part this has to with the fact that the small fry may not have the resources to fight. In Richard Kwak’s case (the case Nocera outlines in his article), Richard Kwak was essentially bankrupted by his fight against the SEC (which he won in the end).

Now, I don’t think that Nocera’s point is particularly original or insightful. I have expressed this thought before as have others. But, I think (and these are my thoughts not those of my partners or my firm) that the same bias against the small exists in the corporate finance side of the SEC as well as in the enforcement side. I am not trying to make that case. My view, which I have expressed before, is that fraudulent activity is randomly spread throughout the market. Instead, I want to point out that confidence in the regulators is really key to confidence in the market.

Consider that a huge portion of the investing community (baby boomers) is trying to retire or prepare for retirement right now. These folks may want to have a portion of their investments in equities, and it is one thing to take normal market risk for an appropriate portion of your portfolio. But, is the risk that the regulators are not watching the big players (or giving them a pass because they are part of the club) a normal market risk? I think not.

It is unfair to assert that the bias at the SEC is solely or even primarily responsible for the woes in the capital markets, but it doesn’t help. To bring back a robust capital market you have to do a lot of things, but one of them is restore confidence in the regulators. To turn to the entrepreneurial world, without a robust market for new issues, exists will continue to be disappointing (both IPOs and M&As). A lot of other things have to be done, but the tone at the SEC affects the venture world.

The SEC needs to take a very tough and probably very public look at itself to achieve a change in perception.